Exelon Offers $6.2 Billion for NRG After Shares Sink

By Jim Polson and Paul Dobson

Oct. 20 (Bloomberg) -- Exelon Corp., the biggest U.S. utility company, offered $6.2 billion for NRG Energy Inc., following Warren Buffett in trying to acquire cheapened power assets after the credit freeze dragged down stock prices.

Exelon's unsolicited, all-stock bid comes after Princeton, New Jersey-based NRG lost half of its market value in two months. Buffett's MidAmerican Energy Holdings Co. agreed on Sept. 18 to buy Constellation Energy Group Inc. for $4.7 billion, less than half the company's market capitalization just a week earlier. Buffett also invested in NRG this year.

Buying NRG, the second-biggest power producer in Texas, would give Chicago-based Exelon more generation outside its Illinois and Pennsylvania operating bases, including a nuclear plant stake southwest of Houston. Nuclear power is about 70 percent cheaper to produce in the U.S. than electricity from the most efficient natural-gas-fueled plants, according to Natixis Bleichroeder Inc. NRG, Exelon and other power producers have proposed 24 new reactors to help add needed generation capacity without increasing greenhouse-gas emissions.

``Exelon couldn't build the plants for the same price it would buy NRG for,'' said Nathan Judge, an analyst at Atlantic Equities in London who rates Exelon shares ``underweight'' and owns none. ``It also gives them access to a bigger balance sheet to fund things like new nuclear plants.''

Premium Is 37%

NRG's owners would get 0.485 share of Exelon for each of their shares, valuing the company at $26.43 a share, Exelon said in a statement late yesterday. The offer is 37 percent higher than NRG's closing price on Oct. 17. NRG traded above $39 as recently as Aug. 28.

Exelon fell $1.55, or 2.8 percent, to $52.95 at 9:56 a.m. in New York Stock Exchange composite trading. The stock has dropped 41 percent since the end of June. NRG jumped 27 percent to $24.52.

NRG's power plants alone are worth $63 a share, more than double Exelon's offer, based on transactions over the past two years, said Gordon Howald, an analyst at Calyon Securities USA Inc. in New York. Buffett's Berkshire Hathaway Inc. acquired its NRG stake in the second quarter, when the stock averaged $42.55.

``Exelon is offering a pretty substantial discount to what Berkshire Hathaway paid,'' said Howald, who rates NRG shares at ``buy'' and owns none. ``The upside potential for NRG as a standalone company is much higher, assuming they can get through this credit crisis. I think they have enough strength to say, `This is not good enough.'''

NRG's Response

The transaction will add to profit in the first full calendar year after its completion, excluding merger-related costs, Exelon said in its statement. NRG said it will review the bid and urged shareholders to take no action.

Exelon Chief Executive Officer John W. Rowe met with NRG's CEO, David Crane, on Sept. 30 to discuss a possible merger, according to Exelon's statement.

NRG rejected a $7.86 billion takeover offer from Atlanta- based Mirant Corp. in 2006. NRG was spurned itself in May on an $11 billion, unsolicited offer for power producer Calpine Corp.

NRG has proposed building two new reactors at its South Texas Project nuclear station by 2015, about a year ahead of a Texas project proposed by Exelon.

``The NRG plant has more political backing than the Exelon plant'' because San Antonio's municipal utility owns 40 percent of the project and the city of Austin owns 16 percent, said Judge of Atlantic Equities.

Credit Rating

Exelon said it would bring a superior credit rating to the table and would reduce NRG's debt leverage.

NRG, which emerged from bankruptcy protection in December 2003, has a rating of Ba3, three levels below investment quality, from Moody's Investors Service. Exelon is rated Baa1, three levels above junk status.

Judge said Exelon's proposed takeover is predicated on expectations of reducing debt costs by financing much of NRG's $8 billion in debt.

``There's refinancing risk, and this is the biggest credit crunch since the Great Depression,'' Judge said. ``This is going to be a real nervous spot for investors.''

Among other transactions this year, National Grid Plc sold its Ravenswood power plant in New York City to TransCanada Corp. for $2.9 billion in April after the U.K. company bought U.S. utility KeySpan Corp. last year for $7.3 billion. Reliant Energy Inc., owner of power plants in nine U.S. states, made a deal this month on preferred stock deal that leaves it open to a takeover.

Stock Offer

For Exelon, buying NRG would increase generation capacity to 47,000 megawatts, most in the U.S., and diversify its holdings, CEO Rowe said in the statement. Exelon, already the largest U.S. nuclear power producer, would have 18,000 megawatts of nuclear capacity. That's enough power for about 14.4 million average U.S. homes, based on an Energy Department estimate.

NRG said in a statement that it's being advised by Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC. Kirkland & Ellis LLP is legal counsel.

The value of takeovers and asset deals announced by U.S. power companies so far this year has tumbled 67 percent from a year earlier, when buyers led by KKR & Co. LP bought the biggest Texas power producer, the former TXU Corp., in a record leveraged buyout, according to Bloomberg data.

This year's data excludes the Exelon offer and NRG's unsuccessful offer for Calpine.

Berkshire Hathaway, based in Omaha, Nebraska, had 3.24 million NRG shares as of June 30, according to a public filing. Ranked the world's richest man by Forbes magazine, Buffett built Berkshire by investing in out-of-favor securities and buying businesses whose prospects and management he deemed superior.

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net.